Liquidity and Dividend Policy: International Evidence

Carroll Howard Griffin

Abstract

Since the days of Miller and Modigliani, academics have been studying dividend policy. There have been many theories as to why companies declare dividends, under what circumstances investors may prefer dividends to other forms of compensation, and factors that cause dividends to rise. However, the concept of liquidity has until very recently been largely ignored. This paper examines liquidity and dividend policy on the international level to determine what relationship the liquidity of a firm’s stock has on the decision of how much dividend to disburse to investors. It finds that in several specific cases, there is an inverse relationship between stock liquidity and the dividend amount paid. This perhaps would point to dividends indeed at times compensating for lower stock liquidity.

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